Pactiv Evergreen Inc. (NASDAQ:PTVE) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Good day and thank you for standing by. Welcome to the Pactiv Evergreen’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Curt Worthington, Vice President, Strategy and Investor Relations. Please go ahead.

Curt Worthington: Thank you, operator and good morning, everyone. Thank you for your interest in Pactiv Evergreen, and welcome to our second quarter 2023 earnings call. With me on the call today, we have Michael King, President and CEO; and Jon Baksht, CFO. Please visit the Events section of our Investor Relations website at www.pactivevergreen.com and access our supplemental earnings presentation. Management’s remarks today should be heard in tandem with reviewing this presentation. Before we begin our formal remarks, I would like to remind everyone that our discussions today will include forward-looking statements, including but not limited to, statements regarding our guidance for 2023. These forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by our forward-looking statements.

Therefore, you should not put undue reliance on those statements. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2022, and our quarterly reports on Form 10-Q for the quarters ended March 31st and June 30, 2023, for a more detailed discussion of those risks. The forward-looking statements we make on this call are based on information available to us as of today’s date, and we disclaim any obligation to update any forward-looking statements, except as required by law. Lastly, during today’s call, we will discuss certain GAAP and non-GAAP financial measures, which we believe can be useful in evaluating our performance.

Our non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. And reconciliations to the most directly comparable GAAP measures are available in our earnings release and in the appendix to today’s presentation. Unless otherwise stated, all figures discussed during today’s call are for continuing operations only. With that, let me turn the call over to Pactiv Evergreen’s President and CEO, Michael King. Mike?

Mike King: Thank you, Curt. Good morning, everyone. Yesterday after market closed, Pactiv Evergreen reported solid second quarter results, including adjusted EBITDA of $217 million, with margin expansion relative to the first quarter. We generated strong free cash flow of $74 million. We reduced our debt, and we achieved important milestones in our beverage merchandising restructuring. Our performance in the quarter reflected a return to more traditional seasonality, disciplined cost control across the organization, as well as we adapted to the current environment and continued our multiyear journey to eliminate waste and improve our productivity. Throughout the first half of the year, the consistent theme across our industry has been the uncertain macroeconomic environment and the impact of persistent inflationary headwinds on consumer spending.

As our second quarter performance demonstrates, our company continues to execute on the strategic priorities and deliver solid results despite these headwinds. Turning to Slide 4, I I’ll start today’s call with a brief review of our key strategic priorities. I will also provide an update on the beverage merchandising restructuring, including an overview of our new segment reporting structure. John will then discuss our second quarter results in detail and cover our updated 2023 outlook before moving to a question-and-answer session. Moving to Slide Number 6, I’ve now been with the company as the CEO for just over two years. So, I wanted to take a moment to reflect on how far we’ve come and highlight some of the successes we have had since launching our transformational journey.

We acknowledge that we faced challenges over the last few years and the journey is far from over. That said, we are extremely proud of the great strides the organization has made in the early stages of our transformation. This slide really puts the transformation into perspective. Our underlying value proposition remains the same. We have the broadest product and substrate offering in our markets with leading positions in most of our core product categories and the commitment to expand our sustainable offerings with an unrivaled production and distribution footprint that allows us to deliver any product to any place, anytime. With long-standing relationships with blue-chip customers and brands over the years, we’ve built partnerships with our customers to help them proceed to meet the changing needs of the consumer.

And as a result, we are uniquely positioned to capitalize on favorable long-term fundamentals across our end markets, generating attractive free cash flows and EBITDA growth. These core strengths underpin the base of our transformation that will propel profitable growth into the years to come. To provide you with some perspective on how far we’ve come, at the beginning of the transformation, we were a global company. We are vertically integrated from paper mills to converting operations. At the same time, our operations were fairly decentralized, and our plant operated somewhat independently. Lastly, we had an elevated net leverage profile, reflecting our previous private company structure. What we’ve built is a best-in-class team and implemented a number of operational strategic initiatives to strengthen the business and put us in the best position to execute this transformation.

On the right side of the slide, you’ll see what we are moving through, some of which we’ve already achieved in some areas are still in flight. We have streamlined the organization to focus on the regions and businesses that are best positioned to drive shareholder value. We concluded that we do not have the necessary scale outside of North America, and our paper mills require significant capital investment to generate attractive returns for our shareholders. So, we made the decisions to reduce our exposure in these areas. These were not easy decisions, but we strongly believe that resulting focus in the more capital-efficient business profile is more compelling for our stakeholders. We also created centers of excellence across manufacturing, engineering, logistics, supply chain, and finance to reduce waste and drive continuous improvement across the enterprise.

Operational excellence is a very important component of our journey, and we have begun reaping the productivity and efficiency benefits of those efforts. These advances have already contributed to our performance over the course of 2022 and into 2023. We’re going to highlight those efforts today because they are central to our ongoing transformation, and we still have significant room for additional gains. We’ve invested in our product portfolio to stay on trend and increase our sustainable offerings with the acquisition of Fabric Cal in 2021. This acquisition increased our exposure to consumer product packaging and brought sustainable brands like Greenware into Pactiv Evergreen. Finally, we have significantly reduced our net leverage ratio.

We’re on pace to be in the low 4s by the end of the year and have line of sight to be under four times next year. Of course, we wouldn’t be doing all of this if we didn’t believe that the resulting business profile put us in the best position to drive profitable growth in the future. The fact remains that we have the leading positions in almost all of our product categories and are well positioned to capitalize on favorable secular growth drivers. I strongly believe in celebrating our successes and our company has achieved many impressive milestones. But in order to put all this together to a proper context, it’s important to explain the foundational work that has made this all possible. Please turn to Slide 7. Those who know me know that I’m brutally honest about admitting when issues need to be addressed.

I’m very passionate about building a winning high-performing organization. For Pactiv Evergreen, it’s not a stretch to say that we are effectively reimagining our company from the ground up, beginning with our mission, purpose, and values and extending through our key strategic initiatives. Firstly, we had to reestablish our common purpose, packaging a better future. It’s the foundation for everything we do, and it’s the compass for all aspects of our organization. Next, our values are the very fabric of our business. Together with our purpose, they act as our DNA. We recognize the entire organization needed to adapt and buy into these foundational beliefs to build an accountable high-performing culture ultimately resulting in improving our results in all areas of the business.

For Pactiv Evergreen employees, our purpose goes far beyond making great products for great customers and brands. This is our joint belief that we can make this world better every single day through our efforts as a Pactiv Evergreen family. We make our communities, our neighborhoods, and those around us better using our efforts, and this business is a springboard for a better future. Our purpose is truly becoming an inspiring heartbeat of this great organization. From there, we define our key strategic initiatives with the goal of reinventing our business and ultimately unlocking Pactiv Evergreen’s full potential as an excellent focused winning business. Over the past two years, there really has been a grassroots effort across all aspects of our organization as everyone has embraced our journey towards excellence, particularly within the operational excellence pillar.

In 2021, we started by stabilizing our operations and focusing on eliminating value leakage within our facilities. We recognize that we needed to do a better job of balancing our cost of demand levels, managing our production schedules and optimizing the flow of products across our network. Today, our plants are more agile and are better equipped to scale with changing market conditions. We’ve seen better overall equipment effectiveness, lower unplanned downtime, and higher productivity across the board. To put this into perspective, our journey from $531 million of adjusted EBITDA in 2021 to a $785 million adjusted EBITDA last year would not have been possible without these efforts. While we have made significant progress in our journey, the more exciting part for Pactiv Evergreen is that we have a great deal of opportunity to continue growing and unlocking our full potential.

With this foundation, we are now focused on applying these improvements to a platform that serves as the springboard for future value creation. Moving to Slide Number 8. The next phase of our journey kicked off this year with the implementation of the Pactiv Evergreen Production System, also known as PEPS. This really institutionalized and standardized everyone’s efforts across the organization. PEPS isn’t just a production system it’s a whole list of management philosophy that touches all aspects of our operations. It measures performance across all of our facilities in a consistent and standardized method, it drives accountability through all levels of our manufacturing plant, warehouses, and centers of excellence. It also promotes best practices and continuous improvement.

In short, PEPS is an investment into a road map that leads our facilities to success while inspiring the company’s strategic goal of eliminating waste. This slide provides an overview of the key elements of PEPS, how we measure success and where we are in the journey. PEPS consists of six elements, environmental health and safety, quality, people, asset care, continuous improvement, and supply chain management. These elements are supported by a total of 250 concrete directions and expectations for implementing the system called requirements. In order for a plant to become PEPS certified, it must demonstrate documented policies and procedures as well as operational adherence with an at least 70% score of the PEPS’ requirements, including 100% of the requirements related to EH&S and quality.

Each certification level raises the bar for adherence with the PEPS requirements. With each plant that becomes PEPS certified, we increase our opportunity to share best practices and improve our ability to replicate operational excellence across the organization. As you can see, we have a total of five certification levels, starting with bronze and concluding with diamond. And I should stress that it requires a full commitment from everyone at the facility to achieve any level of PEPS certification. From bronze to diamond, this is also a multi-year effort as we move all of our plants to a unified production system. We must all recognize this doesn’t happen overnight. With that said, all of our locations have completed their self-assessments, which is the critical first step in their path to operational excellence.

Within that, 27 have completed the first formal PEPS assessment, and of those 27, six of the production facilities have achieved brand status in just the first six months of rolling out the PEPS program. And we are hoping to reach a total of eight plants certified by year-end. This is a tremendous accomplishment in the very short period of time, and we hope to build on that momentum by having 75% of our plants certified by next year and 100% by 2025. We anticipate three to five sites that will achieve silver next year and have the goal of having our first gold site certified before 2025. We are still early in the PEPS journey, but the operational improvements at our facilities are significant, and we’re excited about the impact this will have throughout the organization in terms of waste elimination and improving the scalability in our operations.

Please turn to Slide 9. Another team that I would like to highlight is our ESG team, which continues to execute on our sustainability goals. As a reminder, our sustainability missions provide innovative products that deliver safe, fresh, convenient Food and Beverages while evaluating a planet, people and our communities. We’ve set the ambitious goal of having 100% of our net revenues coming from products made using recyclable or renewable materials by 2030. An important enabler of our sustainability journey is our ability to develop sustainable solutions for our customers and help them meet their sustainability goals, making us a trusted partner and supplier of choice. In an effort to help our customers make educated buying decisions, we commissioned two studies to measure the environmental impact of several products we offer.

One study compared our fresh beverage cartons to alternative formats and found that our currents have less overall environmental impact. The other study compared Metrays [ph] made from seven different materials, and the results show that our versions with recycled content offer our customers a product with the lowest overall environmental impact. Second, we know that investors, regulators and other key stakeholders are increasingly emphasizing finite risk related disclosures, and we are executing on our plans to achieve greater transparency when it comes to these matters. Perhaps the most significant step we’ve taken is to identify and disclose our climate-related risks, which you’ll find in our climate-related financial disclosures report released earlier this year, along with our CDP disclosure, which was submitted just last week.

Turning to Slide 10, our beverage merchandising restructuring continues to progress on schedule, and we remain on pace to achieve the operational milestones that we communicated from the outset. As a reminder, this is an effort to streamline our physical footprint to focus on converting operations, resulting in lower operating costs in a more capital-light operating structure, both of which supports an increased free cash flow generation. We successfully ceased operations at the Canton Mill and Olmsted Falls facility on May 24th, which was ahead of our previous guidance that we discussed in the first quarter. We continue to review strategic alternatives for Pine Bluff and Waynesville as well. We do not have a definitive timetable for this process.

We intend to provide additional updates on the status of that review throughout the balance of this year. Lastly, as we previewed in our first quarter results, the Food Merchandising and Beverage Merchandising businesses have been combined, and we are now reporting the results for the new segment this quarter. We remain on pace to achieve the expected $30 million in run rate cost benefits from the restructuring in 2024, and we are excited about the company’s enhanced competitive position in Food and Beverage Merchandising as a result of this streamlined operations and lower CAPEX requirements. Overall, it has taken a tremendous effort from all of our employees, particularly the employees in the impacted facilities to help us achieve these very important milestones.

I’m proud of everyone’s dedication, commitment, and continued hard work along the way. Turning to Slide 11. Now that we have combined our Food and Beverage Merchandising businesses into one reporting segment, our company now consists of two reporting segments which is Foodservice and our Food and Beverage Merchandising businesses. Based on our 2022 results, our Foodservice segment accounts for approximately 44% of our consolidated revenue. Likewise, the new Food and Beverage Merchandising segment accounts for the remaining 56% or consolidated revenue. In the following slides, I’ll provide an overview of each segment in more detail. Slide 12. This shows an overview of our new Food and Beverage Merchandising segment, which combines the broad product lineup of our food merchandising business with the fresh beverage cartons and filling equipment from our legacy beverage merchandising businesses.

These businesses serve grocery stores, meat, egg, agriculture, and CPG processors as well as beverage companies. We expect our Food and Beverage Merchandising segment to benefit from changing consumer behavior that drives long-term growth. Our customers are expanding the range of prepared food offerings to address the consumers’ desire for fast, fresh, and convenient meals. Consumers are also increasing their consumption of fresh proteins and produce as well as non-dairy and specialty beverages in support of a more healthy active lifestyle. We’re extremely proud of our strong position in the Food and Beverage market with customers, including nine of the top ten U.S. grocery retailers and eight of the top ten largest meat companies in the U.S. Slide 13 includes an overview of our Food Service segment, which produces food containers, drinkware, tableware, and service wear.

Food Services primary channels are chain restaurants, food distributors, convenience stores, and institutional food service outlets like airports, schools and hospitals. We expect our Foodservice segment to capitalize on secular tailwinds such as the expansion of takeout, curbside pickup, and delivery facilitated by e-commerce as well as changing consumer eating habits that benefit restaurants and convenience stores. Our food service customers are also trending towards products with better performance and sustainability features. We expect this to drive incremental value for our business. We are proud to be a top supplier to many of our customers across our product categories in the aggregate, including four of the largest QSR groups. In addition, we are a top supplier of exclusive branded items for the top broad line distributors in the U.S. With that, I would now like to turn the call over to Jon to discuss our second quarter results in detail, including our segment performance.

Jon?

Jon Baksht: Thanks, Mike. I’ll start with our second quarter highlights on Slide 16. We reported net revenues of $1.4 billion for the quarter. As expected, this represents a decrease compared to the second quarter of last year, which benefited from a combination of tight supply and favorable timing on contractual pass-throughs to generate historically strong spreads. Similar to last quarter, the year-over-year comparison was also impacted by divestitures that occurred during 2022 as well as fewer operating days at our Canton Mill, which ceased operations in May. Second quarter adjusted EBITDA was $217 million as we were successful in high-grading our volume mix while maintaining cost discipline across the enterprise. This also allowed us to expand adjusted EBITDA margin by 200 basis points compared to the first quarter and matched the very strong adjusted EBITDA margins from the second quarter of last year.

As we previewed on our first quarter earnings call, we increased free cash flow with $74 million in the second quarter, which includes $42 million of restructuring-related cash outflows. Excluding those outflows, free cash flow was over $110 million, reflecting a strong inherent cash generating potential of our platform. This helped us repay $180 million of our debt during the quarter. Free cash flow benefited this quarter from $47 million of inventory reduction, the majority of which was related to closing the Canton Mill during the quarter. This brings us to $166 million of benefit over the last three quarters. To put this into context, we completed our strategic inventory build about a year ago with the goal of increasing our service levels, which was needed during a period of higher market uncertainty.

We have better alignment with our customers today, which has allowed us to work towards a more normalized inventory level and free up cash along the way. As expected, net leverage increased to 4.7 times in the quarter due to the second quarter of 2022 rolling off our LTM adjusted EBITDA figure. As year-over-year comparisons ease during the second half of the year, we remain confident that we will achieve net leverage in the low 4s by year-end. Further, we expect that the actions taken this year will allow us to continue driving free cash flow generation and de-levering in 2024 and beyond. Turning to Slide 16, our end markets are showing signs of stabilizing and supply chains continue to normalize. In addition, we are driving alignment with our customers to meet consumers’ changing demands.

This comes against the backdrop of inflationary impacts on consumer spending, raw material costs, and interest rates. While each of these areas has moderated sequentially, they remain elevated compared to last year. However, the company has responded effectively to these challenges by managing our controllable costs to maximize profitability and free cash flow. As expected, overall customer demand rose in the second quarter compared to the first quarter as our business benefited from the traditional seasonal uplift caused by warmer weather, which tends to increase demand for cold beverages, fresh produce, and outdoor entertaining, which in turn drives demand for our products. Additionally, customer inventory stocking was mostly complete by the end of the first quarter, so we did not experience material headwinds on that front during the second quarter.

Outside of our material cost pass-throughs, pricing levels generally reflect the cumulative effect of our value over volume strategy over the past year as we focus on meeting our customers’ needs. Movements from last quarter, we benefited from lower transportation costs and in line haul rates continued to improve compared to this time last year. In addition, we are seeing benefits from managing controllable costs by improving the efficiency of our internal logistics network and scheduling our production labor more effectively. Finally, we continue to manage our interest rate exposure by proactively paying down floating rate debt, including repaying $180 million of debt during the second quarter. Now turning to Slide 17, before I discuss our second quarter results in detail, I wanted to provide a brief explanation to the new segment financial reporting using our full year 2022 results as a reference point.

Starting with Food and Beverage Merchandising, revenue and adjusted EBITDA mostly consists of legacy food merchandising business and legacy beverage merchandising business. Although it’s better aligned with our customers, we reorganized the management of a handful of product lines from our Food Service segment to the new Food and Beverage Merchandising segment. Based on full year 2022 results, that reorganization amounted to $169 million of revenue and $21 million of adjusted EBITDA that was added to Food and Beverage Merchandising results. Likewise, the only change to the food service report financial results was the reduction of revenue and adjusted EBITDA by the same amounts. Our results for the second quarter of 2023 reflect this new reporting structure.

Continuing on Slide 18, second quarter year-over-year results. To set the stage, the second quarter of 2022 represented the seasonal high point for the year, which impacts our year-over-year comparisons. The second quarter of last year benefited from historically favorable spreads, driven by the timing of our contractual past dues, coupled with general supply tightness to benefit the second quarter market dynamics relative to the rest of the year. The second quarter of 2023 reflects the more traditional seasonal trends. Net revenues were down 13%, volume was down 6%, mainly due to the focus on value over volume and the market softening amid inflationary pressures. Price/mix was flat, revenues were down 7% due to the divestiture of Beverage Merchandising Asia in August 2022, and the Canton Mill impact in second quarter 2023.

Adjusted EBITDA decreased 13% due to lower sales volume and higher manufacturing costs, driven by inflationary impacts on conversion costs and lower absorption. This also reflects the impact from the divestiture of Beverage Merchandising Asia and the closure of the Canton Mill, partially offset by lower transportation costs. Free cash flow increased due to a net working capital benefit, driven by inventory reductions and lower capital expenditures, partially offset by restructuring-related cash outflows and higher interest expense. Moving to Slide 19, for sequential quarter comparison, second quarter net revenues were $1.4 billion, approximately flat versus the prior quarter. Higher sales volumes due to seasonal trends were offset by the closure of the Canton Mill during the second quarter of 2023 and unfavorable pricing driven by the contractual past-dues of lower material costs.

Adjusted EBITDA was $217 million for the quarter, a $28 million increase from first quarter of 2023 levels. Despite revenue being approximately flat, we benefited from higher sales volume, lower manufacturing costs, and lower transportation costs, partially offset by unfavorable pricing and cost pass-through and the closure of the Canton Mill. Free cash flow increased due to the timing of annual incentive compensation payments, improved operating results, and net working capital benefit driven by the closure of our Canton Mill, partially offset by restructuring-related cash outflows and the timing of interest and tax payments. Continuing on Slide 20 and our results by segment, within Foodservice, we continued to have positive momentum with our key strategic customers, and we are effectively balancing production costs with demand levels.

This has helped to offset foot traffic in quick service restaurants and full-service restaurants, which were lower than last year as consumers responded to higher menu prices across the retail spectrum. This dynamic has been partially offset by consumers shifting their spend for in-restaurant dining to fast food and from higher rent to low rent QSRs and fast food outlets. But in general, market volumes are lower than last year. Pricing in Food Service was lower than last year, mainly due to the timing of contractual pass-throughs on our key resins like polypropylene, which was lower than second quarter of last year. Starting with year-over-year, Food Service comps are difficult due to the favorable market dynamics last year. Net revenues were down 12%, volume was down 6%, largely due to a continued focus on value over volume and overall declines in market demand.

Price/mix was down 6%, partially due to the lower input costs. Adjusted EBITDA was down 20% due to unfavorable pricing comparison and a cost pass-through, lower sales volume and higher manufacturing costs, partially offset by lower transportation costs. Quarter-over-quarter benefited from seasonality, primarily in cold cuts. Net revenues were up $42 million or 7%, mostly due to higher volume, partially offset by price. Adjusted EBITDA was up $22 million or 21% due to higher volume and lower manufacturing costs, partially offset by unfavorable pricing of cost pass through and higher employee-related costs. On Slide 21, in Food and Beverage Merchandising, the business unit executed well as we completed the Canton Mill closure and integrated Food and Beverage into a single business unit, all while maintaining high service levels.

We are seeing elevated inflation caused consumers to reallocate their food spending within the retail channel to favor certain product categories like protein and eggs while reducing spend on categories like favorable containers. In the beverage side of the business, the results are impacted by the divestiture of our Asia business and fewer operating days at the Canton Mill. We also experienced a slower-than-expected ramp of the production in [indiscernible] outage that occurred at the end of March into early April. Overall pricing and mix were higher partially due to the cumulative impact of our value over volume strategy over the past year. In addition, our overall mix benefited from reduced uncoated freesheet production as the Canton Mill ceased operations during the quarter.

Year-over-year comparisons are impacted by the divestiture of our Asia business and the Canton Mill closure. Net revenues were down by 11%, volume was down by 7%, mainly due to a focus on value over volume and the market softening and the inflationary pressures. Revenue was down 9% due to the dispositions. Price/mix was up 4%, largely due to pricing actions taken to offset higher [indiscernible]. Adjusted EBITDA was down 2% due to higher manufacturing costs, lower sales volume, the closure of the Canton Mill and the divestiture of Beverage Merchandising Asia, partially offset by favorable pricing net of material costs pass-through and lower transportation and employee-related costs. If we now have the impacts of the dispositions, revenue was down approximately 7% and EBITDA was up approximately 4% on an adjusted basis.

Quarter-over-quarter, net revenues were down by $45 million or 5%, mainly due to the closure of the Canton Mill, while higher sales volumes due to seasonal benefits, primarily in our agriculture and retail channels was offset by unfavorable pricing. Adjusted EBITDA was up $8 million or 8% due to lower manufacturing costs and higher sales volume, partially offset by unfavorable pricing and material cost pass-through and the closure of the Canton Mill. Turning to Slide 22, I’d like to take the opportunity to reiterate the commitments that we have highlighted throughout the last year. First, we are committed to aggressively deleveraging our balance sheet and preserving our liquidity. We expect our net leverage to end the year in the low 4s. We also anticipate that our momentum will allow us to bring our net leverage into the 3s in early 2024, and we’re not stopping there, as our focus will remain on debt pay down.

Not only will that help reduce our interest burden, it will help us provide flexibility to invest in our future and drive profitable growth. Second, we are committed to driving free cash flow growth through the economic cycle. This year is a great example of how our business is able to deliver on this commitment despite underlying economic headwinds and the meaningful onetime cash outflows related to the beverage merchandising restructuring plan. Third, our commitment to generating sustainable and reliable returns remains a key priority. As we complete the final stages of the Beverage Merchandising and restructuring, we expect our business profile to benefit from lower capital intensity and reduced earnings volatility. Just as important, we have demonstrated our willingness to optimize our portfolio by divesting non-core businesses to help us focus on our core markets and maintain a disciplined capital allocation process.

During the second quarter, we proactively reduced total debt by repaying $180 million of our $1.2 billion term loan due 2026, making a total debt reduction of $410 million since year-end 2021. After the close of the second quarter, we extended the maturity date of our $250 million revolving credit facility from August 2024 to August 2025 and substantially maintain the terms and conditions in the existing credit agreements. This is a favorable outcome as it preserves our liquidity and access to capital while also allowing us to pursue a longer-term extension at a more opportune time in what we anticipate to be a stronger credit profile. As a result of the debt repayments, our cash balance declined to $302 million and total debt declined to $3.8 billion, resulting in net debt of $3.5 billion and a net leverage ratio of 4.7 times.

I’d also like to point out that the increase in net leverage during the second quarter of 2023 is a function of the second quarter of 2022, rolling off the back end of the LTM adjusted EBITDA metric. As you might recall, we posted adjusted EBITDA of $249 million in the second quarter of 2022, which is our strongest quarter of 2022. As our business exhibits more traditional seasonality this year, we expect the second half to outperform the same period last year, which will help us to achieve our year-end net leverage target. Now, turning to Slide 23, similar to Mike, I also wanted to take a moment to reflect on my one-year anniversary with Pactiv Evergreen. During my first year in the company, we have rolled out a more robust set of KPIs, tendered around operational performance, capital efficiency, balance sheet management, and volatility management.

Ultimately, we want to execute on the actions to drive shareholder value so we look for this broader suite of financial KPIs to yield benefits in the future by focusing on the metrics that directly impact value creation. To unpack the four main pillars further, operational performance refers to how profitable we are and how much cash flow we generate. Capital efficiency measures how effective we are at generating cash from the assets we managed and how efficient we are deploying incremental capital. The gold balance sheet management is to set the right level of debt for our company and the right level of investment in working capital. With volatility management, we want to increase the predictability and dependability of our financial performance.

We are excited about the momentum we are building and look forward to quantifying these KPIs further in the future. Now, please turn to Slide 24, our company continues to execute at a high level across both business units and we remain well positioned to capitalize on future growth opportunities. As we’ve highlighted, the outlook for the U.S. economy remains uncertain as higher interest rates and still elevated inflation — consumer spending, which may also negatively impact our customers’ purchasing decisions and order patterns throughout the remainder of 2023. Despite these headwinds, our second quarter results demonstrate the resilience of our business and the company’s ability to deliver sustainable results despite the uncertainty. We expect that our full year results will be at the high end of our previously guided adjusted EBITDA range of $775 million to $800 million.

From a macroeconomic standpoint, our full year adjusted EBITDA guidance assumes no material deterioration in the second half of the year compared to current conditions. Our full year guidance for capital spending remains unchanged versus our original guidance and our expectations for total cash restructuring costs remain at $130 million to $160 million, with the majority of these costs expected to occur during 2023. Likewise, we reaffirm our guidance for full year free cash flow, which we expect to be in excess of $200 million. We’ve provided additional detail for this estimate in the appendix to the presentation. We believe this demonstrates the excellent free cash flow generating ability of our business and anticipate that will help us achieve our net leverage ratio target of the low 4s by year-end.

With that, let’s open it up for questions.

Q&A Session

Operator: [Operator Instructions]. And our first question comes from Ghansham Panjabi of Baird. Please go ahead.

Matthew Krueger: Hi, good morning. This is actually Matt Krueger sitting in for Ghansham. I hope you’re doing well. So, if we’re sticking to the letter of the law, your EBITDA guidance actually implies lower second half earnings despite what would appear to be easier comparisons and potentially some raw material or cost benefits. What’s driving the lower second half earnings dynamic and how much conservatism is baked into the implied second half EBITDA guide?

Jon Baksht: Yes, good morning Matt. You’re right. Our guidance implies for the second half of the year is just under $400 million. While we’ve taken great strides in managing through some of the recent shopping environments and returning to more normalized levels, there still are some uncertainties going into the second half. I mean, we’re entering into the first normalized post-COVID season for that part of the year. We’re closely watching inflationary impacts as it relates to labor markets, logistics, etcetera. Our operations are performing well, and we’re cautiously optimistic.

Matthew Krueger: Okay, great. That’s helpful. And then, given the challenging volume backdrop across the consumer landscape in recent quarters and increasing pressure by retailers to accelerate throughput, what are your thoughts on whether the customer base is ready or willing to ramp promotional activity into the second half of 2023 and into 2024, are you seeing any actions already?

Mike King: Yes, good question. So as it relates to the volume backdrop and promotional activity, I think if you look at where we’ve been able to navigate successfully is maximizing the value over volume when it comes to both price cost, but also what we see in terms of demand challenges. And so if you look at the first two sequential quarters this year, we’ve not seen a ramp up in any way in terms of promotional activity. And largely, we see our customers enjoying the same strategy in terms of value over volume, whether it be as you highlight, retail, but even in the other channels where it’s menu prices through the drive-through or menu prices within a sit-down restaurant. I think until we see a shift there, we’re not going to see a large divergence back to a higher demand cycle from the consumer. I think it’s a wait and see for us.

Matthew Krueger: Got it, that’s helpful. And then if I could just sneak one more in, just to follow up on that. Given that variability in the market and the re-segmentation, can you provide us with an updated view on segment volume expectations for 2023 just to close it out?

Mike King: Yes, maybe just given some color on the overall Mosaic would be good. And so similar to the rest of the sector, year-to-date volumes, especially when you look at comps from last year and some of the snapback effect from a strong Q4 in 2021 and then a grand reopening again after an Omicron variant in Q1 of 2022, there was a large buy-in from just about all sectors in terms of inventory replenishment. We could sell every unit we can make. And if you recall, our Q1 and Q2 of 2022 and like many others, label is still a challenge and we will be able to get inventory levels back to help that pendulum swing a little too far. And so, you’ve got to take that chatter out of what’s really happening in the market. And largely, we reported this in Q1, we saw destocking moderate significantly.

And while normal destocking happens in the normal inventory and supply cycle, I think it has been historically high in the last kind of sequential quarters. We reported in Q1 that we felt like destocking across our business and with our customer base was largely moderating, and we still feel that way. Our volumes are down sequentially and are down year-over-year in our food businesses. The other thing we have in our volume Mosaic is a little unique is the fact that we’ve closed the Canton Mill. We’ve divested an Asia business, and that skewed some of the beverage, our formal beverage business unit numbers. And so we’re fairly flat within that. And then our food businesses are strong. We see an outpace of what the market is doing in our food businesses despite kind of what we’re seeing in the market.

So, it’s just a bit noisy because of the comps. I also think that any further destocking we’re somewhat unique and somewhat different in how we go to market with our supply chain. And so, we don’t see that destocking given our category leadership to the extent maybe some others have.

Matthew Krueger: Got it, that’s helpful. I will turn it over. Thanks.

Operator: Thank you. One moment for our next question. And our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson: Yes, thank you. Good morning everyone. Maybe taking actually that last kind of discussion on volume trends by business, maybe digging into the Foodservice side a little bit. I mean, the volumes were down 6% organically versus a year ago. I know there’s a little bit of noise with the re-segmentation. But if I think about kind of the multiyear kind of trend on volumes and relative to going back to pre-pandemic levels, it would seem like the volume in that business is now meaningfully below pre-pandemic levels even if Foodservice traffic is largely normalized. And so, just any additional kind of color or thoughts around that and maybe scope any kind of conscious business exits or product line exits that you are trying to drive value and mix over just pure volume that would help kind of bridge that gap?

Mike King: Yes, it’s a great question. And so specific to Foodservice, you got to think about our business in two big end markets. We get our broad line and distribution markets and then what we call our chain, our QSR markets. And they’re both a little different. And we absolutely — looking back at the last 24 months, we have made a cautious decision to not be everything to everyone. And we certainly have focused on commanding our space and not competing with imports and things like that. So, we have absolutely consciously exited some areas that were unprofitable or less profitable. I would tell you largely though, the way to think about our foodservice business is where we focus in those two channels, whether it’s a sit down, C-store or a fast food restaurant.

We’re winning in all those spaces versus what the market is seeing both sequentially and when you look at the back half of 2023, you’re going to see that our plans to continue winning there, even despite some of the pricing elasticity that’s allowed us to enjoy like our customers have the value over volume. And so if the market, depending on how you look at the market, let’s just say the market decline in those two end markets year-to-date between 6% and 9%. Our volumes are down in that space, 6%. We’ve expanded our unit sales in both end markets through that same period. So despite how it looks, in a year-over-year and a sequential percentage, we are enjoying a higher quality of revenue and a modest unit growth in this environment.

Adam Samuelson: Okay, that’s all very helpful. I will pass it on. Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from George Staphos of Bank of America. Please go ahead.

Unidentified Analyst : Yeah, hi, good morning. This is actually Kashan sitting in for George. We had conflicting calls this morning. So, just to stay on volumes for a second. From some of the other reports, we’ve seen some variability month-to-month just on volumes. So I guess can you first talk about maybe how the quarter progressed from a volume perspective, kind of how exit rates are trending? And then I guess where you see some of this momentum building, whether it be the product or I guess, customer level there?

Mike King: Yes. So, exit trends, I would say the back half of the quarter was definitely reassuring from a demand standpoint versus maybe how we entered the queue. You got to set some of the Memorial Day and Mother’s Day and Easter chatter side in some of our end markets. But if we normalize looking at year-over-year, we really do think the resiliency in the consumer is a bit stronger and maybe points to why we feel like at least the back half unit volume is going to continue to stay where we kind of are from a run rate, which is stronger than I think a lot anticipated coming into the year. That said, it’s — the inflection point around what are the real step change, what needs to happen to see demand return across all end markets to a pre-2019 level? I do think that that remains to be seen, and we’re watching it close, but we’re cautiously optimistic about a resilient consumer in the back half, and we’ve definitely seen that get better through Q2 in our end markets.

Jon Baksht: Yes. And one thing I would add, just in terms of revenue that relates to the volume dynamic that Mike is talking about is we are expecting that revenues in the second half will be lower, just really one of the reasons just due to falling resin prices. But we do expect that our price cost actions, along with cost savings would mitigate any top line softness and keep us on track to achieve the top end of our adjusted EBITDA as well as free cash flow outlook for the year.

Unidentified Analyst : Okay. Got it. Appreciate that. And just longer term, I guess, as you look at your transformational journey and you work towards some of your goals, particularly on leverage towards 3 times next year, I guess, how can we think about the capital priorities of the business longer term in terms of CAPEX value return and potentially inorganic opportunities for Pactiv here?

Mike King: So certainly, our balance sheet is a focus and it’s a high priority for the business. It’s been a high priority, and we’re going to continue to focus on paying down debt. And getting into the 3s next year is definitely a starting point and what we do beyond that, absolutely and it always remain a priority. I would tell you, if you look at the strategic steps we’ve made, it’s really about a shift in geography from a sustained capital outlay to — how do we get more capital leaning into the growth side of the business. And so, you’re seeing us take a lot of steps to go capital light as a business model. And we absolutely acknowledge that we haven’t been capital light in terms of all of our segments and where we’re divesting and where we’re exiting and where we’re taking steps to lean in to new substrates and other substrates is where you’d expect us to be focused, and that’s exactly what we’re doing.

Jon Baksht: And what I’d add is if you look at the business profile, the free cash flow generation of the business is quite strong. As I highlighted in the prepared remarks, we’re going to generate over $200 million of free cash flow this year, and that’s despite some meaningful outlays before the restructuring of the Beverage Merchandising business unit, which will amount to around $120 million this year. And going into next year, we continue to expect a strong free cash flow profile, if anything improved as we continue to try to get to a more capital-light structure. And within that, we’re going to continue to be aggressive in paying down debt as one of those priorities while balancing the growth opportunities in the business. We should be able to do them all. But debt pay down is a priority, as we’ve highlighted.

Unidentified Analyst : Okay, thanks. I will turn it over.

Operator: [Operator Instructions]. Our next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Arun Viswanathan: Great, thanks for taking my questions. I hope you guys are well. So I guess, first off, on the guidance itself, if you look at the upper end of the range, maybe in the $7.90s and you take off the first half, it looks like you’re around $3.90 for the second half. And if you annualize that, maybe you get to a similar range for next year. What’s wrong with that math, I mean, what are maybe some big buckets you guys have dollar-wise that we could point to that would show some EBITDA growth, is it maybe some recovery in foodservice and volumes as simple as that or some restructuring gains, and would it depend on a stronger promotional environment or at least a stronger consumer, or how do you think about growth into next year? Thanks.

Jon Baksht: Yes, sure. As you think about the exit rate for the second half of the year, some of the tailwinds that we have working for us. So as you mentioned, the restructuring, we talked about that being a $30 million annualized benefit. And so we are just starting to see the impacts of that in the first half of the year, given that the Canton Mills closed late May, we’ll start seeing more of that in the second half of the year and then going into next year. One of the other big buckets is clearly around the operational execution that Mike and I touched on in the prepared remarks. As the market has normalized, we’re able to do things more efficiently. We’re getting closer to our customers with just giving us better alignment with our planning, improvement in our labor scheduling, minimizing some of our transfer freight being more efficient, on our logistics being leaner on inventory.

So, we’re in the early stages of those improvements, but we should see more of those operational improvements irrespective of the market environment coming into next year.

Arun Viswanathan: Great. Thanks for that, John. And beyond that, just maybe if you could comment on maybe some of the longer-term dynamics. It seems like, again, a lot of our companies are discussing inflation impact on the consumer and destocking for your own business, it appears that sometimes those could also act as tailwinds as far as shifting folks into different channels such as QSR that would benefit you. Are you still seeing those tailwinds and are those expected to persist in the next year?

Mike King: Yes, tailwinds might be a little bit of a generous term for us. But what we see is a resiliency that may be is unique to a Pactiv Evergreen and that shifting consumer everybody’s they need calories. So, how they choose to get those calories and where we play allows us to maybe insulate the business a bit more, it’s a bit more resilient and the buy down that you see going from in-home to fast food or from in-room dining to more retail or see store purchases. The fact that we’re strongly positioned in all those segments allows us to enjoy those sales for those calories. And so, those category shifts don’t necessarily whipsaw the business like maybe other very dense segmented suppliers. The other thing I would say is the consumer, despite anything you might read continue to prove the backtrack wrong.

And so we’re watching that close, and we continue to have our supply chain and our manufacturing footprint aligned to continue to scale down and scale up as needed. And you’re seeing any results of that in our first quarter of this year and our ability to react with inventory in both for the consumer and our customer forecasts a bit different. And so the way we bring product to market through large-scale distribution and be able to touch kind of any corner of the country with any product we make with a buffer allows us to address that quickly. And we’ve used that to grow sales volume where maybe others couldn’t. And so we’re excited about the shift in consumer because it really helps us win. And we expect that actually to kind of continue as the consumer tries to figure out how they want to get their calories.

Arun Viswanathan: Thanks.

Operator: Thank you. I would now like to turn the conference back to Mike King for closing remarks.

Mike King: Thanks, Ginny for moderating today’s call. And thank you all for joining. As we close out today, I’d like to turn your attention to Slide 26. As mentioned, Pactiv Evergreen is a strong, differentiated, growing, and socially responsible business. We’re an industry leader in Foodservice and Food and Beverage Merchandising within markets that are largely recession resilient. We’re focused on generating sustainable returns and our strong experienced leadership team has demonstrated a willingness to transform the portfolio in ways that put us in the best position to deliver on our commitments. We offer a broad array of products and substrates, and we have long-standing strategic partnerships with our customer base, many of which are blue chip companies.

We are constantly working to innovate and develop the highest quality sustainable products. We set a goal of having 100% of our net revenues in 2030 comes from products made from recycled, recyclable, or renewable materials. All of this yields strong adjusted EBITDA and free cash flow generation, which we carefully managed to drive deleveraging and further growth through our disciplined capital allocation process. We look forward to updating you again in the next quarter, and thank you again for joining today.

Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect.